Global ethylene forecast hinges on local access to feedstocks, demand

Ethylene-producing assets that have access to low cost gas feedstocks, such as the ones in North America, will lead the competition, according to a new chemical market forecast from Wood Mackenzie.

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Ethylene production from export-oriented steam crackers
associated with advantaged gas-based feedstocks is set to
alter the global ethylene markets, according to new analysis
from energy research firm Wood Mackenzie's new Chemical
Markets Service.

"The key competitive differentiator for ethylene producers is
access to low cost feedstocks or proximity to local demand.
Through 2030, advantaged cracker investments will continue in
the Middle East, sharply increase in North America, and then
later develop in Russia and The Caspian," said Stephen
Zinger, head of Americas chemical research at Wood
Mackenzie.

Ethylene producing assets that have access to low cost gas feedstocks, such as the ones in
North America, will lead the competition with total ethylene
and derivative investment set to reach $40-50 billion in the
next decade.

Over the same time period, global ethylene demand will grow
by 3.3%/year, on average, according to Wood Mackenzie.

In turn, China will continue to have the fastest demand
growth for ethylene and ethylene derivatives and will satisfy
this demand through increases both in domestic production
capacity (coal-to-olefins and naphtha cracking) and imports
from producers around the world with advantaged feedstocks.

Wood Mackenzies new long-term ethylene analysis
categorizes the transformation of the global ethylene market
into three types of market positions; locations supportive of
new export-oriented ethylene investments based on advantaged
feedstocks (North America, Middle East, and Russia and The
Caspian); locations supportive of new ethylene investments
which have higher costs due to reliance on naphtha feedstocks
but with very high levels of local demand growth (China, India and Southeast Asia); and
locations of existing aging assets with a high cost basis
that will be subject to rationalization, consolidation, and
specialization (Europe, Japan, Korea, and Taiwan).

"Producers and consumers involved in the global
ethylene industry will have to employ vastly different
strategies depending on their location in order to be
successful," explains Zinger.

North American ethylene investment
renaissance

In the next 10 years, Wood Mackenzie estimates total
investment in ethylene and derivatives is expected to reach a
record $40-50 billion in North America. In addition, ethane
feedstocks to make ethylene have
increased from under half of total feedstock for ethylene in
2005 to about 65% of total feedstock in 2013, and are
expected to continue to rise to over 80% of total feedstock
consumption.

"The development of shale gas resources in North America has
triggered an ethylene investment renaissance, with the
abundance of competitively priced natural gas liquid feedstocks, particularly ethane,"
adds Zinger.

Wood Mackenzie says domestic demand in North America for
ethylene derivatives will grow more slowly than the planned
ethylene capacity increases, which will lead to derivative
exports more than tripling over the next 15 years.

Asia, the most diverse ethylene market

China will continue to add capacity aggressively, with a
significant portion through coal-to-olefins (CTO) plants,
resulting in a rise in self-sufficiency. Although there
have been many announced CTO projects, water supply constraints
and overall environmental impact will slow the
rate of capacity build-up longer term.

"In the next two decades, China's shift to an increasingly
domestic consumer demand driven economy will alter ethylene
and derivative demand patterns, but expectations are that
growth rates will remain strong," said Vincent Sinclair, head
of Asia-Pacific chemical research at Wood Mackenzie.

Over the next decade, the more mature markets of Japan, South
Korea and Taiwan will go through a period of consolidation,
cost cutting and product value creation to increase their
competitiveness, as their export market share to China is
gradually replaced by low cost material from the Middle East,
North America, Russia and The Caspian.

Emerging economies with growing populations including
India, Indonesia, Philippines and
Vietnam have the potential to become the next rapid growth
demand centres in Asia," said Sinclair. "However,
under-developed infrastructure, weak support from local
governments and/or lack of abundant feedstock resources will
continue to slow the pace of ethylene investments in these
countries."

Middle East expected to almost double existing
capacity

Advantaged ethane-based ethylene investments drove massive
capacity growth in the Middle East throughout the 1990s and
2000s, culminating with significant new capacity additions in
2008-2010. The Middle East is again expected to almost
double its existing capacity by 2030 and remain the largest
ethylene derivative exporting region globally.

Forced to change feedstocks by an impending
shortage in ethane supplies, projects in Saudi Arabia, Qatar
and eventually Oman will adjust feedstock mix to diversify
and include LPGs and naphtha.

"This region has been very dependent on exports of ethylene
and ethylene derivatives - a trend that will continue
throughout the forecast period," said Alex Lidback, head of
chemical research for the EMEA (Europe, Middle East and
Africa) region at Wood Mackenzie.

"After decades of stagnation, the Russia and The Caspian
region will undergo considerable change, with plans to add
nearly 10 million tons of capacity by 2030," said Lidback.
"In Russia, capacity expansions are planned in six
discrete production clusters across the Western, Siberian and
Far Eastern territories."

The region's emergence as a major exporter will place
increasing pressure on high cost producers who do not have
the benefit of advantaged feedstock. Europe, in particular, will be
under considerable pressure with the addition of a
neighboring region with low cost supplies. Its ethylene
industry is restructuring due to its weak demand growth,
competitive disadvantages and widely available imports from
low cost producers in other regions.

"Since Europe is forecast to remain
uncompetitive in terms of commodity chemical production,
producers will focus on lower volume, higher-value speciality
products in order to survive," said Lidback.

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